Not married couples Inheritance Tax Planning
We all have as individuals a Nil Rate Band (NRB) of £325K before the inheritance tax is applied on our estate on death. However, married couples benefit from twice the Nil Rate Band (£650K), but that doesn't apply to unmarried couples!
John & Sandra are an unmarried couple with children. They have: House in joint names: £400,000 John has personal savings & insurance: £125,000 Sandra has personal savings & investments: £125,000
Total assets on second death: £650,000
John is dying first and his estate is valued at £325,000 so there is no tax payable as it doesn't go over the NRB. Having a standard Will, Sandra would inherit £125,000 of savings from John plus the full value of the house, with the Inheritance Tax bill on her death (£650K – NRB@£325K = £325K taxable @40% = £130K tax bill)!!
What's the problem? When John dies Sandra inherits his wealth! Can we prevent this happening?
Yes, we would Sever the Tenancy of the property so that it's owned as Tenants in Common. Therefore, John can now re-direct his £325K (£200K of interest in the property, plus £125K of savings) away from Sandra through his Will). We do this by writing a Trust in his Will (Sandra does the same in case she is the first to die). On John's death £325K goes into the trust and if were any other assets these would pass to Sandra, through the Will, but would be taxable. The problem here is she wasn't given the £125K by John in his Will, which she was going to use to live on! However our Trust provides a facility whereby Sandra can borrow the trust fund! She does this by providing an IOU* note for the value of the trust fund. The result is now the sole owner of the legal and beneficial interests in the property and also now owns his £125K.
When Sandra dies: Her estate prior to death was worth £650K. However £325K is paid back to the trustees as a debt (debts are paid back before any valuation on an estate for inheritance tax calculation purposes).
The result is now that on second death there is no inheritance tax liability as Sandra's estate is only £325K and the children (or other beneficiaries) gain an increased inheritance of up to £130K.
*IOU = Promissory Note (a written agreement to repay a debt)
This message was added on Monday 8th February 2016